EngageSmart
Learn from public SaaS companies—a series of individual analyses of successful SaaS companies and business models you can use in your work.
EngageSmart: What do they inspire?
EngageSmart is a leading provider of vertical software solutions across a variety of industries, having built an efficient platform to distribute in a variety of segments and customer sizes. They can serve as an inspiration for efficient go-to-market strategies and business models in vertical software markets. Studying their case, it is impressive how they successfully penetrated their customer persona across highly competitive industries. They have built a strong differentiation on top of their go-to-market strategy, which is a reflection of their expansion into new industry verticals successively and successfully.
They inspired me to consider that their model works best in regions where you have addressable market constraints with Vertical Software. From experience, I have seen vertical software businesses in LatAm with great products and founders that are limited by their addressable market. Having a foundation built upon expanding into new verticals should enable the emergence of new industry leaders that are cross-vertical.
Company Overview
EngageSmart provides a leading vertical SaaS customer engagement software with payment capabilities. Their software enables their customers to manage the engagement of their clients by providing digital and self-service solutions. These customers are SMBs and Enterprise in five target verticals: Health & Wellness, Government, Utilities, Financial Services, and Giving. For each vertical, purpose-built solutions are developed and automated for mission-critical workflows such as scheduling, client onboarding, client communication, paperless billing, and electronic payment processing. The company positions its solutions to act on end markets with burdened legacy systems and manual workflows by digitizing processes and transforming the customer engagement experience, from analog to digital.
The company was founded in 2009 by their CEO, Bob Benett, a serial entrepreneur. Bob was frustrated with the difficulty of the payment process of a Utility Bill, being then inspired to build InvoiceCloud, the predecessor firm to Engagesmart, to serve utility payments. From the ongoing success in utilities in InvoiceCloud, Summit Partners invested in 2017 to fund an identified opportunity to deliver purpose-built payment and management solutions to adjacent verticals. The expansion was successful, and the core business shifted to a multi-product and vertical solutions provider. In 2019, General Atlantic bought a majority stake in InvoiceCloud and later rebranded the firm into EngageSmart, reflecting the new product mix in 2020. In 2021 the firm was listed on the New York Stock Exchange (NYSE: ESMT). Below is a timeline of the company on their website:
EngageSmart went public in 2021, already having a significant scale. In the company's first financial result after their IPO in Q3 '21, they posted an ARR of $222M (Annualized Run-Rate as the company calls it), having continued to grow consistently, posting $377.6M in ARR in Q2’23, representing a 70% growth in the period. This growth is attributed to their continuous expansion across SMB and Enterprise customers; from Q3 '21 to Q3’23 the company increased its customer count from 77.4K to 113.2K customers, a 46% growth.
Management credits their success to their disciplined principles for sustainable and rapid growth. These principles are based on their key strategies:
“Grow with existing customers. We grow with our existing customers in two ways: adding product features and additional functionality to our solutions and continuing to drive digital adoption of our existing solutions
Win new customers. Our verticals are large, underpenetrated, and non-cyclical with significant whitespace, low digital adoption, and growing usage of software and payments.
Build new, and enhance existing, products. In order to maintain our product leadership, we continue to invest in new products and develop the tools and features that customers need to win in the marketplace.”
Expand into new verticals. Many verticals are only just beginning their digital journeys, which provides a tremendous runway for growth. We intend to continue to expand into new verticals and sub verticals over time, and we are particularly attracted to verticals with low digital adoption and growing usage of software and payments.
Pursue select strategic acquisitions. We plan to pursue strategic acquisitions that we believe will be complementary to our existing verticals and solutions and increase the value proposition we deliver to our customers. For example, we may pursue acquisitions that we believe will help us expand within existing or new industry verticals or enter new markets.”
Product
EngageSmart products are mission-critical software and payment solutions targeted to their customer verticals. Each of those products is built to focus on specific verticals featuring management and payments solutions for their workflows, such as scheduling, client onboarding, client communication, paperless billing, and electronic payment processing. These products enable their customers to overcome operational inefficiencies and low digital adoption in their workflows by providing convenient, user-friendly, and self-service capabilities for their clients.
Engagesmart achieved a differentiated position against incumbents and potential entrants by being product obsessed while designing solutions that are customer and vertical focused. Their vertically tailored solutions include:
“SimplePractice. An end-to-end practice management and EHR platform that health and wellness professionals use to manage their practices. SimplePractice serves clinicians, who are our customers, throughout their career journey, allowing them to manage their practice development from licensure to private practice.
InvoiceCloud. An electronic bill presentment and payment solution that helps our Government, Utility, and Financial Services customers digitize billing, client communications, and collections.
HealthPay24. A patient engagement and payment platform that helps health systems, physician groups, dental practices, and medical billers efficiently drive patient self-pay collections.
DonorDrive. A fundraising software platform that helps non-profits, healthcare organizations, and higher education institutions produce virtual events, launch branded donation campaigns, and create peer-to-peer fundraising experiences.”
Summary Metrics and GTM (Go-to-Market)
The company has been releasing its financial results with a track record of success in expanding in their existing markets and new verticals. Here are some highlights:
As of the latest quarter, engage smart had 109.7 thousand SMB and 3.4 thousand enterprise customers across their 6 industry verticals.
The company Processed 43.8M Transactions in Q2´23 vs 36.1M in Q2´22. Transactions are defined as the number of accepted payment transactions, such as credit card and debit card transactions, ACH payments, emerging electronic payments, other communication, text messaging and interactive voice response transactions, and other payment transaction types.
EngageSmart had $377.6M in ARR (Annualized Revenue) in Q2´23 a 28% Q2´23 YoY Revenue Growth.
The ARR consists of $212M in SMBs and $165M from Enterprise Customers. SMBs and Enterprise products have grown at a rate of 30% and 25% Q2´23 YoY respectively.
The company added 19,656 customers with a Net Retention Rate of 117% in FY22.
The business operates with high 79.2% gross margins in Q2´23 with their current product mix that includes payments and software.
The company R&D and G&A costs represent 16.6% and 12% of the company's revenues in Q2´23.
The company posted an adjusted EBITDA of $19.4M and $4.3M Net income representing a margin of 20.5% and 4.6% respectively in Q2´23.
At the same time the company has posted 24.9M and 18.4M in operating cash flows in 2023 and 2022 respectively.
Engagesmart has been growing rapidly and profitably with a rule of 40 score of 48%.
EngageSmart's business model is to offer customers a SaaS they describe as a single instance, multi-tenant, true Software-as-a-Service ("SaaS") vertical solutions. The products generate revenues by recurring monthly SaaS subscriptions and by transaction and usage based on the number of transactions or the dollar value processed with their solutions. By having an Engagesmart solution, their customers accelerate revenue collection from payments and facilitate customer acquisition and management via the product's features.
EngageSmart’s go-to-market strategy is tailored to the vertical and size of the customer. Size is segmented across SMBs and Enterprise, which represent 56% and 44% of the total revenues, respectively. For SMBs, they rely on a free trial to paid customer sales model. To generate demand they use a combination of search engine optimization, word-of-mouth, paid customer referrals, and search engine marketing. On the other hand, the Enterprise Model is based on a direct salesforce in conjunction with partners such as back-end software providers. For the Enterprise Sales the company has over 300 unique integrations to customer billing and client management systems. These partners together with deep integrations enable greater reach in their vertical markets improving the sales processes with pre-qualified leads.
Looking forward, the company believes that their growth will come with their future success by increasing revenues from customers, acquiring new customers, expanding their products and expanding into new vertcals. For SMBs they believe that their primary competitors are pen and paper, point solution vendors, and a number of horizontal and vertically-specialized solutions, including practice management software providers. At the same time, Enterprise solutions compete against billing and payment systems internally developed by financial institutions, as well as legacy and modern solution providers.
Market Opportunity
The company estimates the revenue opportunity for their current solutions to be approximately $28 billion: $10 billion addressed by solutions in our SMB Solutions segment and $18 billion addressed by solutions in their Enterprise Solutions segment.
The revenue opportunity calculation in the SMB Solutions segment is done by taking the total number of health and wellness clinicians addressed by our SimplePractice solution using data from the Bureau of Labor Statistics and multiplying by the total spend opportunity per customer based on the current prevailing market price.
For the Enterprise Solutions segment it is done by taking the total number of bills per year in the United States, as estimated by Aite Group, and multiplying by their average revenue per transaction. The verticals that are currently included in the Enterprise total addressable market are Health & Wellness, Government, Utilities, Financial Services, and Giving.
In addition, given that the market will continue to expand and digital adoption increases with the adoption of the technology, the average revenue per customer should increase as customers grow and they expand the breadth of their solutions.
Acquisition Strategy
Engagesmart's new vertical expansion strategy includes the execution of acquisitions of vertical software in existing or new markets. They use acquisitions to solidify their leadership position in their vertical markets and accelerate their growth by cross-selling offerings. The company has concluded a total of 7 acquisitions which include Payment Service Network (PSN), Track Your Hours and Luminello. Payment Service Network is a SaaS electronic billing and payment provider for the Utility industry. Track your Hours is a leading provider of software for tracking progress and hours for students and trainees who are in the process of obtaining their licensure as marriage and family therapists, licensed clinical social workers, and licensed professional clinical counselors. Luminello is a Mental Health SaaS in the psychiatric prescriber market. There is a clear strategy of including new offerings operating to increase EngageSmart’s breadth and depth in target verticals.
Investors and Ownership
On September 27, 2021, the Company completed its initial public offering ("IPO"), in which the Company issued and sold 13,620,054 shares of common stock at a public offering price of $26.00 per share, including 620,054 shares issued upon the exercise of the underwriters' option to purchase additional shares. The Company raised net proceeds of $326.4 million, after deducting the underwriting discount of $22.1 million and offering expenses of $5.6 million.
Following the Company's IPO, General Atlantic (IC), L.P. ("General Atlantic") controlled more than 50% of the combined voting power of the Company's outstanding common stock, and the Company is considered a "controlled company" within the meaning of the corporate governance standards of the New York Stock Exchange ("NYSE"). As of March 2023 General Atlantic continues to own a stake of 53.9% and to be the controlling shareholder of the firm.
Below is the ownership structure of the firm:
Financial and Other Metric Outputs
EngageSmart has delivered high growth profitably since their IPO with their SaaS operations across different verticals. They are a rare breed of the Tech IPOs of the 2021 boom cycle that have been able to operate profitably with 20.5% Ebitda Margins, a testament of the capital efficiency in both go-to-market and unit economics in their business models across enterprise and SMB Customers. Engagesmart has been operating with 32% of their revenues in S&M expenses while being able to grow 28% YoY as of Q2 '23. Outputs of other metrics below:
Historical P&L Metrics ($M)
Quarterly Revenue ($M)
Implied End of Quarter Annual Run-rate Revenue($M)
The Annual Run-Rate Revenue (“ARR”) was calculated by multiplying the revenues of the quarter by a factor of 4. Net New ARR represents the difference between the most recent quarter and the past quarter.
Operating Margins (%)
Revenue Retention
Revenue Mix
Cashflows
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